Sin Stocks: Definition & How Are They Valued?

What Are Sin Stocks?

Sin stocks are a matter of preference. What one trader might consider as sin stocks, another might have a different set of stocks that they consider as sin stocks. For example, one might consider that the stocks of a company that is drilling oil at a sensitive location, causing environmental damage to be sin stocks. Then again someone else might not consider this as bad and they might consider that the stocks of a pharmaceutical company manufacturing abortion pills might be a sin stock. So, basically sin stocks boil down to your preferences. There are no fixed parameters that define sin stocks, so there are no fixed stocks that fall under this category.

However, having said that, you can always try to categorize them. So, stocks of companies that manufacture and promote products that might be harmful or detrimental to the society in some way, might be termed as sin stocks. Such companies mainly revolve around tobacco, alcohol, pharmaceuticals, etc.

So, How Are They Valued?

When it comes to the stock market, the value of a stock or a company is based on their ability to generate profits and improve the flow of profits in course of time. One of the best ways to evaluate these stocks is to use their P/E Ratio or the price to earnings ratio. This metric reveals how many times more than the earning are investors willing to pay for a stock. So, higher the P/E ratio, the more investors will pay for it. Another similar metric would be the price to book or P/B Ratio which is equally efficient. Book value is essentially the net value of a company, after all the value of their liabilities have been subtracted from their gross value. If a company is trading below their book value, then they are an undervalued business or investors might have lost interest in the company. On the other hand, when a company is trading above their book value this implies that the market has taken a liking towards the company’s assets to pay more than what their value is.

Obviously the market assigns valuation amongst these companies differently. But different valuation does not mean they are treated any differently from other stocks. In fact if you take a look at some sin stocks, like take for example a tobacco company, you might find that they have generated profitable payoffs for its investors throughout years. But that does not in any way mean that all sin stocks might prove to be profitable.

Bottom Line

The first myth that we come across when sin stocks are considered is the fact that they are valued differently because of their product offering. It is not so. If you sift through performance data and conduct your research you will be able to find out that this is not really true at all times. Over the long run, the market seems to behave on its own and assigns valuations based on the earnings growth of different companies. The inelastic demand of such products further explain the situation. The stigma that surrounds these stocks are extremely prejudiced and should be demystified as much as possible.